1. Field of the Invention
This invention relates to methods and apparatus for implementing and administering an insurance program to protect against relatively large liabilities with a small probability of occurrence, specifically, a precipitous move in stock market prices, and consequently a corresponding move in the price of futures contracts or index options, caused by an unexpected catastrophe such as a sudden grave illness or death of the President of the United States.
2. Description of the Related Art
For the sake of clarity the following description of this invention will only discuss the situation where financial futures contracts are bought and the insurance covers precipitous declines in the price of the contracts. It should be noted, however, that this invention also applies to the situation where financial futures contracts are sold, in which case the system creates, monitors and administers insurance against precipitous increases in the price of the contracts. The invention may be similarly advantageously applied to the purchase and sale of commodity futures contracts, options on futures contracts and index options as well.
Investors are risk averse in various degrees and use various strategies to limit their risk to desired levels. In most cases there will be an orderly market and the investor's strategy will result in the limiting of loss to an amount which closely corresponds to the desired degree of risk. However, the rare occurrence of an unexpected catastrophe such as a sudden grave illness or death of the President of the United States could likely cause a disorderly market or even a halt in trading, with the result that the investor's risk-limiting strategy fails and a much larger degree of loss is sustained. For example, stop-loss orders would probably not work as desired after an unexpected catastrophe because the market price would likely incur a trading gap and pass right through the stop-loss point. The distance between the lower actual price at which the stop-loss order is filled and the higher stop-loss point represents an additional degree of undesired risk, and this additional risk can be much larger than the expected degree of risk. That is, the strategies to limit risk are successful in most cases but do not protect against relatively large liabilities with small probabilities of occurrence. Thus, the strategies have no insurance protection aspects.